Unsanitized: The COVID-19 Report for July 24, 2020

How the Federal Reserve's Thumb is on the Bailout Scale
Also, updates on Social Security and debt collectors

 

Federal Reserve chair Jerome Powell, speaking before the House Financial
Services Committee in June. (Bill O'Leary/Washington Post via AP)

Days Without a Bailout Oversight Chair

119
,
and that's actually today's lead story. Four months ago Democrats
inserted accountability and oversight provisions into the CARES Act,
saying that they would aggressively track how money is being spent,
particularly the money cannon constructed at the Federal Reserve. Four
months later, there's nobody chairing the main oversight entity, the
Congressional Oversight Commission (COC). Yet the commission is still
doing its work, putting out its third report this week
,
and planning a hearing on one of the Fed's credit facilities, the Main
Street Lending Program.

The finding in the third report was kind of interesting, and it reminded
me of another milestone this week: the 10th anniversary of Dodd-Frank.
That legislation was really more of a suggestion to regulators to change
their rules, with some vague and discretionary guidelines for how to do
it. The regulators really had the power to shape Dodd-Frank, as we see
with the Trump administration undermining it without having to change a
word.

The CARES Act gave similar discretion to the Fed and the Treasury
Department, as Bharat Ramamurti, one of four commissioners on the COC,
explained to me. And that means that Jerome Powell and Steven Mnuchin
have tremendous power to shape the crisis response. They're using it
to benefit large corporations and not smaller rivals or state and local
governments.

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At the core of this is an unanswered question about the purpose of the
CARES Act money cannon. "Is the goal of these programs to correct the
problems that existed in the market and bring them back to what they
were before, or to further subsidize these companies or state and local
governments because we're in the middle of the crisis?" asked
Ramamurti in an interview. There seems to be a disparity in how that
question is being answered, depending on the beneficiary.

For example, the corporate bond market is not just being backstopped.
There's a clear subsidy being granted, where the cost of borrowing is
now cheaper than it was. The Fed is buying corporate bonds, despite a
stabilized market, and the commission is wondering why. Powell told
Congress last month that the Fed had to "maintain its credibility"
by delivering on the promise to buy up bonds.

In other markets, however, promises aren't being kept. The "Main
Street Lending Program," intended to cover companies too big for a
small business PPP loan and too small to participate in corporate bond
markets, has essentially been non-functional. As of July 15 it's made
exactly one $12 million loan. This too was a promise, to sustain these
types of businesses. When asked about it by the commission, Powell and
Mnuchin said that lack of utilization is not necessarily bad, it just
means the market is working as it should and there's no need to
intervene.

"That's an inconsistent approach," Ramamurti said. The Fed is
intervening in large corporate debt markets because it allegedly has to,
but not intervening in smaller lending markets. Similarly, the Fed
isn't doing much lending in the Municipal Liquidity Facility (MLF),
despite dire needs in state and local governments. So the biggest
corporations are benefiting from a subsidy while everyone else is
subject to the whims of the market.

A bigger problem is that Congress appropriated $500 billion to these
facilities, but didn't say whether they wanted that actually spent or
just used to backstop lending. That matters, because it affects the
terms by which the loans are given. "Riskier" lending in this case
would mean that more companies, including those on the edge, could
benefit. "I wish Congress had been more clear about it," Ramamurti
said. The relevant section of the CARES Act only says that the Fed is
authorized to address liquidity problems arising from COVID-19. "It
left the Treasury and the Fed a lot of discretion to how to make that
determination."

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The Fed could actually figure this out. It already can execute emergency
lending without losing much money. "If you add this money on top,
they're saying, 'we're giving you this money to take on more
risk,'" Ramamurti explained. But that standard is being applied
differently depending on the recipient. "I just think that the program
has not delivered for smaller companies and state and local
governments."

Ramamurti said that the commission has actually operated decently
without a chair. To me, the lack of a chair creates an informal
limitation, in the signal it gives to the political system. Any entity
operating without a chair for so long is not seen as a priority.
Obviously there aren't a lot of people out there on which Pelosi and
McConnell would agree; this was easier in 2008 when Democrats had
unified control of Congress and could choose an Elizabeth Warren to do
oversight. But Democrats knew that going in and could have placed some
requirements in the law to get a chair seated.

The key feature of a chair, Ramamurti maintained, is a background of
conducting robust oversight. Staff can assist on working knowledge of
Federal Reserve programs, he said. But knowing how to procure documents,
and a commitment to fighting the bureaucracy to get them, is of
paramount importance. I think I'd rather have someone with a passing
interest in the technical details. If Pelosi and McConnell continue to
dither, however, Ramamurti believes that there's still value in the
four-member commission.

"We got bipartisan agreement [in the report]," he said, citing
agreements over the MLF and the Main Street program. "That's a
valuable thing that Congress seizes upon. We are getting through to our
intended audience a little bit."

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Updates

We haven't actually seen the Republican crisis response bill yet, but
Mitch McConnell did confirm
that the
TRUST Act is part of the base package. As I reported yesterday
,
the TRUST Act, written by Mitt Romney, is a vehicle to guarantee a
fast-track vote to cut Medicare and Social Security, circumventing
normal Congressional rules. The idea that you would even think about
deficit reduction in the middle of this crisis is appalling. And if
followed through, these cuts would likely kick in during the next
presidential term, with both parties on the hook for slashing
grandma's Social Security check, just the way McConnell wants it. This
bears watching. (If Republicans ever release a bill that is.)

Also, a better update: remember that story I wrote about how private
debt collectors, including banks, can grab stimulus checks
?
Sen. Sherrod Brown (D-OH) and others wrote a bill

to prevent such thievery by encoding CARES Act payments as federal
benefits that cannot be garnished or used to offset existing debts. That
bill passed the Senate yesterday
,
by voice vote. The CARES Act payments are out the door, but this will
become the standard for any other payments, and there is another round
expected in the next bill. "The House must immediately take up this
bill and ensure that the money allocated to working families by Congress
goes to pay for food, medicine, and other necessities, not to debt
collectors," Brown said in a statement.

Odds and Sods

I was on Your Call with Rose Aguilar on KALW radio in San Francisco
talking about small business and the pandemic. Listen here
.

Last chance to register

for today's Prospect Zoom event at 1pm ET, where Zach Carter, HuffPost
writer and author of The Price of Peace, the New York Times bestseller
about the life of John Maynard Keynes, and I will ask each other
questions about our books. (Mine is called Monopolized
, but you
know that already.) This should be really fun. You can register here

to participate in the event live.

We Can't Do This Without You

Today I Learned

* There are now "money tip" stories

about how to survive when the $600 unemployment boost runs out. Sigh.
(CNBC)

* Workers suing OSHA

for refusing to protect them. (ProPublica)

* Over 3 in 4 Americans

can now cast votes by mail during the pandemic. Now we'll see if we
can count them all. (Washington Post)

* The long-term effects of the virus are still unknown and rather scary
.
(New York Magazine)

* Another round of supply chain deficiencies

at testing labs. I thought market economies didn't have shortages.
(New York Times)

* The dream of a Jacksonville mega-convention is over

for Trump. They couldn't secure it in a month's time, I gather.
(Axios)

* We're running out of cans

for canned food. (Bloomberg)

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